Why conduct Tax Due Diligence when acquiring a business?

26 November 2020 David Robinson View all News

When looking to buy a business, it is common for the purchaser to carry out Tax Due Diligence. The process will allow them to determine whether there might be any unexpected skeletons hidden in the closet - and if there are, decide what to do about it while there is still time.

But a good Tax Due Diligence exercise also has other benefits, such as helping to identify opportunities and support deal negotiations.

Reasons to carry out thorough pre-purchase checks:

1. Manage Risk

The process will identify whether there are any areas of tax risk within the company they are looking to acquire. Buying a company means that you are buying the taxation history of that company too. The downside to this is that you might be acquiring some historical tax problems.  

If any risks are identified, then they can be covered by a specific indemnity in the purchase agreement. Any underlying issues can then be dealt with after the deal has completed. 

 

2. Identify Opportunities

A Tax Due Diligence exercise can also help identify tax opportunities to implement when the transaction has been completed. For example, the company may not have claimed all of the available relief to which it was entitled. This might include R&D tax credits or Capital Allowances not being fully claimed.

The purchaser could benefit from any such missed opportunities, by putting in relevant claims post deal. This can, therefore, have the effect of reducing the overall cost of the purchase. 

 

3. Support negotiations

Detailed Tax Due Diligence can provide the purchaser with information that can be used in negotiations on the deal.  i.e, using the information to reduce the consideration, or in extreme circumstances, allowing the buyer to walk away from the deal.

 

4. Small deals

As well as Tax Due Diligence, it is common when buying a company to undertake Financial Due Diligence.  However, on smaller deals, the cost of Financial Due Diligence may not be feasible. Tax Due Diligence without FDD can be a cost-effective way of getting some comfort on historical risk before the acquisition. 

 

5. Peace of mind

Reassurance that there will be no nasty surprises arising from historical taxation issues can provide peace of mind to a purchaser. 

 

A Tax Due Diligence exercise can help a buyer identify and quantify any tax risk associated with the business. It is a vital stage of the acquisition process which provides the purchaser with the assurance of no nasty surprises. 

 

We recently held a webinar on successfully selling your business during a pandemic.  A recording of that webinar is available to view.

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